Article excerpt

The NBER Program in Monetary Economics, established in 1991, encourages practical research in macroeconomics with an emphasis on issues relating to monetary policy. Its goal is to promote a greater understanding of the relationship between central-bank actions and the economy in order to help the world's central bankers better meet the formidable challenges they face. Toward these ends, program members pursue a range of individual and collaborative research studies. Program members and their guests meet twice a year to present and discuss this research. In addition, members meet for one week during the NBER's Summer Institute to present recent research and collaborate on research in progress. Central bankers regularly are invited to attend these meetings and discuss their recent decisions and concerns. Over the past several years, program members have heard from Federal Reserve Governors Lawrence B. Lindsey and Janet L. Yellen; then President of the Federal Reserve Bank of Boston Richard Syron; then Governor of the Bank of Canada John Crow; former President of the Bundesbank Helmut Schlesinger; and the Bank of England's Chief Economist Mervyn A. King, among others.

In addition to regular program meetings and the Summer Institute, the monetary economics program sponsors occasional conferences to focus research on specific topics. I ran the last such conference, which produced a recently published University of Chicago Press volume entitled Monetary Policy. Christina D. Romer and David M. Romer currently are organizing the next conference, which will focus on policymaking in low-inflation countries.

Research by program members is diverse. It includes empirical and theoretical work on the effects of monetary policy and the study of alternative policies and institutional arrangements. What follows is a brief description of some avenues of research that program members have been pursuing over the past several years.

The Effects of Monetary Policy

When the central bank changes the quantity of money, what is the effect on the economy? Although this question is at the heart of monetary economics, the answer is neither easy to obtain nor widely agreed upon. From a scientific point of view, the fundamental problem is that central banks do not conduct controlled experiments. If central banks randomized their actions, we could just observe what happened to the economy after these actions in order to see their effects. But, in fact, central banks most often act in response to actual, perceived, or anticipated events. Thus, researchers studying monetary policy confront the difficult task of sorting out the effects of central-bank actions from the causes of those actions.

Monetary economists have tried to solve this problem in two ways. One is to take a narrative approach to monetary history. This approach dates back at least to Milton Friedman and Anna J. Schwartz's classic treatise, A Monetary History of the United States. This NBER-sponsored study examined in detail the causes and effects of major monetary changes over the previous century, with an emphasis on historical and institutional detail. More recently, Romer and Romer have extended this narrative approach. They used the minutes of Federal Open Market Committee meetings to pinpoint dates at which the Fed changed policy toward a tougher stance on inflation. The Romer and Romer dates, as they have come to be called, provide one concrete albeit controversial method for studying the effects of changes in monetary policy.(1)

A second way of trying to disentangle the causes and effects of monetary policy is to take a more econometric approach. That is, rather than relying on a careful reading of history, one can study the effects of monetary policy by applying time-series analysis to macroeconomic data. To make this approach work, some identifying assumption is necessary to sort out cause and effect. One might assume, for instance, that changes in short-term interest rates not explicable by other macroeconomic variables reflect changes in the preferences of the central bank toward inflation. …

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